Monthly Archives: April 2012

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While maintaining a BUY on the stock of Petronet LNG (PLL) we have cut our target price to Rs 175 (8.7x FY14 valuations) as significant headwinds in terms of pricing pressures, step up nature of the input cost pricing could affect fortunes. In addition any clamp down by PNGRB on marketing margins ( a la Indraprastha Gas Ltd) could seriously dent marketing margins and is always a hanging sword. Also PLL has maximised efficiencies of its facilities and further increments in capacity utilizations from the current 107% seem unlikely. Although there is strong visibility on volume growth, capacity expansion is backended for FY13 and hence the stock is expected to remain an underperformer for a couple of quarters. The commencement of the Kochi terminal and jetty expansion activity at the Dahej terminal is expected to lead to significant ramp up in capacity from Q4FY13. However the proposed dilution of equity to raise resources to the tune of Rs 1500-2000 crores for its planned 5 MMTPA facility at Gangavaram, Andhra Pradesh would lead to dilution of future earnings However current valuations still remain attractive (given the adverse macro backdrop for corporate earnings) and our target price of Rs 175 provides a possible 25.7% upside from the current levels.

Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither https://winningtrades1.wordpress.com or myself accepts any liability arising out of the above information/articles.

We initiate coverage on Mahindra & Mahindra Ltd (M&M) as a BUY with a Price Objective of Rs.975. At CMP of Rs.727, the stock is trading at 16.2x and 14.1x its estimated earnings for FY13 & FY14 respectively, representing a potential upside of ~34% over a period of 15 months. UV sales (XUV500 and Xylo) and LCVs (Maximmo, Genio and Gio) are expected to be the key drivers of growth, while the tractor business is expected to weather the cyclical downturn and experience moderate traction. In addition the tangible benefits of the Ssangyong acquisition would be felt over the medium term as the joint R&D efforts and new product launches materialize. We forecast revenues and earnings to grow at a CAGR of 15.6% and 10.7% to Rs.40,062.3 and Rs.3,169.7 crore, respectively over FY12-14.

Key Investment Highlights

1. XUV 500 and refurbished Xylo to sustain volume growth in the UV segment
2. Weathering the cyclical downturn in tractor sales
3. LCV growth momentum to continue
4. Ssangyong on the growth path; but profitability still a while away

We have valued the standalone business at a P/E multiple of 13 on account of its leadership position in its core segments (Tractors and UV’s) while
the subsidiaries have been valued on their respective P/E multiples and we have assigned a 30% holding company discount. While we have valued the profitable unlisted arm of M&M i.e. Mahindra Vehicle Manufacturers Ltd at P/E multiple of 10, the other non profitable businesses have been valued as shown in the table below. Also, we have not valued the defence business and Mahindra Reva Electric Vehicles Ltd as these businesses are in their nascent stage, but could add significant value to the group in the future.

Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither https://winningtrades1.wordpress.com or myself accepts any liability arising out of the above information/articles.

We initiate coverage on Wockhardt Limited (WOCKPHARMA; WPL) as a BUY with a Price Objective of ` 978 (target 10.0x FY14 P/E). At CMP of ` 688 the stock is trading at 4.1x and 7.9x its estimated earnings for FY2013E & FY2014E representing a potential upside of ~73% over a period of 18 months. With the contingent liability concerns addressed and bulk of FCCBs already repaid, the sale of nutrition business will lead to a substantial increase in cash which could be used to draw down debt or pursue organic / inorganic grow opportunities. Further its portfolio of high margin niche products and impressive FTF launches should provide for strong growth in revenues (12.3% FY11-14 CAGR) to ` 5311.2 crore and earnings (123.6% FY11-14 CAGR) of ` 97.8 /share by FY14.

During the period 2003 through 2008, Wockhardt has traded mostly in line with the 1 Year forward PE multiple of its peers viz: Sun Pharma, Cipla,
Lupin and Glenmark. However, post its derivative losses, Wockhardt’s EPS turned negative. Now that the balance sheet is all cleaned up and all
contingent liabilities addressed, we expect that going forward, Wockhardt will catch up with its peers leading to a substantial re-rating of the stock. This implies that it wont be surprising if Wockhardt’s 1 year forwar price earning multiple were to trade in the mid teens, in line with that of its peers.

In addition most the development financial institutions with the exception of LIC (Life Insurance Corporation of India) have virtually exited the counter (or have miniscule holdings). In my opinion the stock has moved into strong hands and smart money continues to accumulate.

Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither https://winningtrades1.wordpress.com or myself accepts any liability arising out of the above information/articles.

51% jump in JLR sales to lead to surprise re-rating of the Tata Motors Lts stock price.

Tata Motors Ltd. (CMP Rs 302) shares are expected to do well on the surprising 51% yoy volume growth for the month of March shown by its global JLR business. The contributing measures to this outstanding performance is the sharp spurt in Evoque sales and beter than expected performance of its Jaguar portfolio.

In addition the 50 bps repo rate cut undertaken by the Reserve Bank of India (RBI) was better than street expectations and signals the end of the rising interest rate scenario. So this should be significantly positive for the Tata Motors domestic business also.

Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither https://winningtrades1.wordpress.com or myself accepts any liability arising out of the above information/articles.

Ironically, Infosys which traditionally has overshot its own guidance has now for the last three quarters been struggling to meet its own forecast. With global budgetary allocations being cut and actual spending lagging these reduced allocations we believe that the entire IT industry is going to be under pressure. Infosys’ guidance on flat pricing and volume growth of 8-10% growth for FY13 was disappointing and we expect the stock to underperform going forward.

Also the FSI space which constitutes ~35% of Infosys’ business has been impacted due to delays in decision making and reduced IT spends due to more lenient regulation. Further, the macro economic situation in Europe (~30% of revenues) is also expected to deteriorate and affect discretionary IT spending and remains
a high risk. With the decision to hike salaries being deferred we expect attrition levels to increase, in case competition implements even moderate wage hikes. Margins (at 32.8% are down by 90 bps QoQ) could also come under pressure in case intense competition leads to pricing pressures.

In the light of above mentioned facts we expect revenue and earnings to grow at a CAGR of 8.7% & 6.1% to Rs 39680 crore and Rs 9362 crore by FY14. In our opinion there is a further downside risk of 7% (Target price of Rs 2234 at 15x FY13 PE) over a period of 12 months. We recommend a SELL on the stock.

Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither https://winningtrades1.wordpress.com or myself accepts any liability arising out of the above information/articles.

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